The legal challenge, led by a pro-EU investment fund manager, aims to force the British government to seek parliamentary approval to trigger Article 50, which sets the Brexit clock running.
Traders said the timing and content of the hearing’s outcome were unclear, prompting investors to stay clear of the pound.
“If the court decides that parliament should be allowed to vote, sterling could rally on speculation that lawmakers may vote against triggering Article 50,” said Charalambos Pissouros, senior analyst at IronFX Global.
“On the other hand, should the court rule that the government can proceed alone, this could be the trigger for the next leg lower in sterling,” he said.
The pound has sold off sharply in the last two weeks on concerns the government will negotiate for a hard Brexit, favouring tighter immigration controls over free trade and thereby hurting the foreign investment needed to fund Britain’s huge current account deficit.
It surged up to 1.5% against the dollar and the euro on Wednesday after British prime minister Theresa May said she would seek “maximum possible access” to Europe’s single market.
She also said she would allow parliament some scrutiny over the process, having previously angered lawmakers — and unnerved markets — for refusing to divulge her strategy and saying she would trigger Article 50 without giving them a say.
However, the pound gave up some of its gains later after Ms May and her Brexit minister David Davis appeared less concessionary in parliament. Ms May also said parliament will not vote on triggering Article 50.
Yesterday, sterling was down 0.1% at $1.219, having tumbled to $1.208 on Tuesday when it appeared to be heading back towards a 31-year low of $1.1450 which it had hit on Friday. The euro was up 0.2% at 90.3 pence.
On a trade-weighted basis, sterling was at 73.8, not far from a record low of 73.3 struck on Tuesday.
Comments from Scottish Nationalist Party leader Nicola Sturgeon that Scotland will publish a fresh independence referendum Bill for consultation next week also soured sentiment.
Year-to-date it is the second worst performing currency of 30-plus tracked by Thomson Reuters Datastream. In a signal that the slide may be starting to push up inflation and hurt consumer spending, Britain’s biggest retailer Tesco pulled dozens of Unilever brands from its website in a row over pricing.
“The current situation is anything but stable and another slide (in the pound) would feed concerns far more than it would help the UK’s competitive position,” said Kit Juckes, macro strategist at Societe Generale.
“And so, it’s worth remaining short sterling against both the dollar and the euro.”
Activist investors who take stakes in companies to push for major change are looking to capitalise on a slide in sterling after the Brexit vote to buy into British targets cheaply.
The amount of money invested by activist investors in British companies hit a nine-month high of €3.7bn in September, according to data from Activist Insight.